Steel Surveyor. The momentum battle AUSTRALIA. Event. Impact. Outlook

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1 AUSTRALIA The momentum battle Event We reassess the earnings outlook following adjustments to commodity prices across the steel complex and adjustments to foreign exchange expectations. Impact Ticker Opinion Current T/P Previous T/P BSL AU Outperform $7.00 $7.20 SGM AU Neutral $8.90 $9.40 Prices as of 18 May: BSL - $5.85, SGM - $8.65 Source: FactSet, Macquarie Research, May 2016 Better near-term pricing. Our commodity team have adjusted estimates for steel pricing to reflect better near-term fundamentals, with our price assumptions rising for both US and Asian HRC. We have also added ~$20/t to Asian HRC assumptions in FY17 (now at $320/t). We do however consider current prices unsustainable, both in Asia and the US. Supply responding. Steel prices have performed strongly, underpinned by better demand and a slow supply response. The signs of change are afoot though, with a supply response now halting inventory declines, especially among traders. Sentiment indicators in our proprietary steel survey have turned rapidly in May. EPS momentum versus Steel prices. While steel prices risk a reversal from recent fortunes, we still see potential positive EPS momentum, particularly for BSL. We have made adjustments in our earnings estimates to reflect the fulsome adjustment in our commodity and fx estimates, which have resulted in downward revisions for both BSL and SGM, but remain ahead of consensus estimates. Stock prices could find support from EPS revisions, but would need to scale the downdraft of falling commodity prices. Outlook We maintain an Outperform opinion on BSL. While the pressure of falling steel prices, particularly in Asia, could be a headwind, we think the case is supported by: 1. Further, albeit more limited, upside in its cost-out in Australia, 2. Valuation BSL is the cheapest steel stock under our global coverage and 3. Increased exposure to the US, where steel market support from increased tariffs could support prices for a little longer than in Asia. Target price revised to $7.00. We maintain a Neutral opinion on SGM. Volatility in scrap prices continues to be a risk for intake volumes. While post-industrial and some sources of obsolete scrap (e.g. autos, demolitions) should respond well to higher prices, other less formal supply sources are likely to be slower to respond, if at all (if prices fall away again as we expect). Cost-out has underpinned SGM s confirmation of a $140m EBIT exit run-rate by late FY16, but we still see sustained volume improvement as a key catalyst to seek from here. 19 May 2016 Macquarie Securities (Australia) Limited Please refer to page 8 for important disclosures and analyst certification, or on our website

2 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Macquarie Wealth Management Sentiment, Steel price reversal and Earnings Our latest China Steel Survey has seen a rapid retracement in sentiment, which has been surprisingly bullish since CNY. While demand looked pretty strong in early May, sequential demand has slowed, albeit that this is partly a seasonal occurrence. However, with supply continuing to ramp up, it means inventory should start to build, resulting in downward price pressure. Fig 1 Sentiment fell sharply in May Are you positive or negative on the market over the next three months? Mills Increasing number of respondents positive Steel traders Iron ore traders Increasing number of respondents negative 0 Source: Macquarie Research, May 2016 Mill profitability continues to incentivise production growth and steel inventories have slowed their decline, with surveyed traders witnessing a slight increase in inventory this is one of the key data points we have been looking for to imply that the market is finally moving into surplus. This reversion in sentiment and fundamentals has driven a sharp retracement in Asian export HRC prices in the last fortnight. From an equities point of view, the question now becomes whether steel prices get the overhand over the stocks, irrespective of the benefits to earnings that would flow from the recent increase in prices in Asia and the US. BlueScope and Sims both have the benefits of meaningful exposures to the US, where tariff imposition seems likely to sustain some of the benefits of the price rally for longer. The momentum battle So while steel prices, and the steel complex more broadly, risk a reversal from its recent fortunes, we still see potential positive EPS momentum, particularly for BSL. We have made adjustments in our earnings estimates to reflect the fulsome adjustment in our commodity and fx estimates, which have resulted in downward revisions for both BSL and SGM, but remain ahead of consensus estimates. So, stock prices could find support from EPS revisions, but would need to scale the downdraft of falling commodity prices. We chart this perspective for BSL and SGM below. 19 May

3 May 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 Macquarie Wealth Management Fig 2 BSL EPS Estimates and Share price Fig 3 Asian HRC and BSL Share Price $A/t BSL Share Price [lhs] BSL FY1 EPS BSL FY2 EPS Asia HRC (/t) BSL Share Price [rhs] Source: Factset, Macquarie Research, May 2016 Source: SBB, Factset, Macquarie Research, May 2016 Fig 4 SGM EPS Estimates and Share Price Fig 5 Turkish HMS Scrap price and SGM Share Price $A/t SGM Share Price [lhs] SGM FY1 EPS SGM FY2 EPS Turkey HMS Scrap (/t) SGM Share Price [rhs] Source: Factset, Macquarie Research, May 2016 Source: Bloomberg, Factset, Macquarie Research, May 2016 In this context, we think it will take some additional factors to support the investment case. We maintain our Outperform opinion on BSL, backed by the following: o o o While we do not believe there to be the scale of upside in the cost-out benefits in its Australian unit as we have witnessed through the course of 1HFY16, we nonetheless believe that there is still some space for further efficiency gains from the revised enterprise agreement at Port Kembla. The acquisition of North Star has bolstered BSL s exposure to the US market, where trade protection seems to be having good effect and could see steel prices materially higher than expected and for it to carry through into FY17 to some extent. Exposure to the US is generally advantageous for any steel industry player at this stage albeit that we do not see this benefit sustained in the long term. BSL remains the cheapest steel stock in Macquarie s coverage universe. 19 May

4 Fig 6 Global Steel Valuation Comparisions - FY17 EV/EBIT 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Source: Factset, Macquarie Research, May 2016 EV / EBIT FY17 Revisions in value drivers Despite a FY17e EPS downgrade for BSL, we remain 17% above consensus. The difference to consensus is largely due to our bullish expectations in Australian Steel Products and Hot Rolled Products North America. Both these businesses have benefitted from adjustments in our steel prices assumptions. Fig 7 EPS adjustments FY16 FY17 FY18 Bluescope Steel New Adjusted EPS (cps) Old Adjusted EPS (cps) Adjusted Consensus EPS (cps) Sims Metal Management New Adjusted EPS (cps) Old Adjusted EPS (cps) Adjusted Consensus EPS (cps) Source: FactSet, Macquarie Research, May 2016 In the context of the recent rebound in prices across the steel complex, and the subsequent fall, our commodity team has revised estimates for a range of key value drivers. Our estimates for iron ore have also seen some meaningful revisions in the medium term, helping to open up spreads somewhat in FY May

5 Fig 8 Iron ore short term gain... Fig 9 Asian HRC steel price LT $2015 Spot 62% Fe iron ore China (new) Spot 62% Fe iron ore China (old) HRC Asian Import (US$/t - Old) HRC Asian Import (US$/t) Source: Macquarie Research, May 2016 Source: Macquarie Research, May 2016 Fig 10 US HRC Price Fig 11 AUD/USD AUD/USD (per period end) HRC US Domestic (US$/t - Old) HRC US Domestic (US$/t) AUD/USD (per end) Series2 Source: Macquarie Research, May 2016 Source: Macquarie Research, May 2016 Fig 12 Macquarie Commodity Price Forecasts Steel-related commodities Changes in Commodity price forecasts Unit CY CY CY CY CY CY HRC Asian Import (US$/t - new) $/tonne HRC Asian Import (US$/t - old) HRC US Domestic (US$/t - new) $/tonne HRC US Domestic (US$/t - old) Steel Scrap - average #1HMS (new) $/tonne Steel Scrap - average #1HMS (old) Spot 62% Fe iron ore China (new) $/t cfr Spot 62% Fe iron ore China (old) Source: Macquarie Research, May May

6 Fig 13 BSL estimate summary Profit and loss FY15a FY16e FY17e FY18e Ratio Analysis FY15a FY16e FY17e FY18e Number of shares m EPS (adjusted earnings) cps Sales revenue P/E (adjusted) x 24.7x 15.0x 9.1x 10.0x Australian Steel Products m EV/EBITDA x 5.5x 4.2x 3.4x 3.6x NZ & Pacific Steel Products m EV/EBIT x 11.8x 7.8x 5.4x 5.9x Global Building Solutions m Operating Cashflow per share cps Building Products ASEAN, Nth Am & India m P/CF x 6.1x 5.8x 4.3x 4.4x Intersegment m DPS cps Other revenue (Including HRP NA) m Net debt m 275 1, Total Revenue m 8,552 9,035 9,730 9,863 Gearing (ND/E) % 6% 23% 13% 6% Grow th 7% 6% 8% 1% ND/EBITDA x 0.4x 1.4x 0.7x 0.4x COGS m (7,927) (8,195) (8,678) (8,864) Interest coverage x 4.5x 5.3x 7.5x 8.1x Grow th 7% 3% 6% 2% Applied assumptions FY15a FY16e FY17e FY18e EBITDA (underlying) m , HRC US$/t EBITDA margin 7.5% 9.3% 10.8% 10.1% Scrap (Korean HMS 1) US$/t Iron Ore - Benchmark US$/t Depreciation m (343) (383) (397) () Hard coking coal US$/t Total non-cash costs AUD$/US$ NZ$/AUD EBIT: Australian Steel Products m NZ & Pacific Steel Products m (33) (61) (3) (3) Global Building Solutions m m 2,000 1,800 1,600 1, 25% 20% Building Products ASEAN, Nth Am & India m ,200 15% Hot Rolled Products North America m ,000 Corporate & Group m (65) (77) (77) (77) % Intersegment m Other m Total EBIT (Underlying) m Margin 4% 5% 7% 6% FY15a FY16e FY17e FY18e 5% 0% Net interest expense m (67) (86) (88) (73) Cash Borrowings Gearing (ND/E) NPBT m Income tax expense m (60) (90) (136) (126) Minority interest m (41) (55) (58) (60) Reported NPAT m Non-recurring item Adjusted NPAT m Adjusted PER (x) 30x 25x 20x Cashflow FY15a FY16e FY17e FY18e EBITDA m , ch. In Working Capital m 69 (58) (61) (18) Net Interest Paid m (67) (87) (88) (73) Tax Paid m (50) (63) (67) (80) Other m (59) (52) (58) (60) Total Operating Cashflow m Capex m (376) (340) (300) (330) Total Investing Cashflow m (411) (1,299) (300) (330) Proceeds from Equity Issues m Borrow ings Movement m Dividends Paid m (17) (34) (34) (57) Other m (47) (20) - - Total Financing Cashflow m (64) (54) (34) (57) Net cash movement m Balance Sheet FY15a FY16e FY17e FY18e Cash m PPE m Total Assets m Borrow ings m Total Liabilities m Total shareholder equity m Source: Company data, Macquarie Research, May x 10x 5x 0x EBIT (m) FY15a FY16e FY17e FY18e EBIT FY15a FY16e FY17e FY18e 19 May

7 Fig 14 SGM estimate summary Profit and loss FY15a FY16e FY17e FY18e Applied assumptions FY15a FY16e FY17e FY18e Total Revenue m Scrap - Asia ($/t) US$/t Growth % -11.3% -21.6% 6.8% -7.3% Scrap - Europe($/t) US$/t Source: Company data, Macquarie Research, May 2016 Scrap - US ($/t) US$/t EBITDA m AUD$/US$ $ Growth % 8.3% -36.7% 59.0% 20.1% EBITDA margin % 4.1% 3.3% 5.0% 6.5% Sales volumes FY15a FY16e FY17e FY18e North America Metals % -14% -12% 1% 3% Depreciation & amortisation m (121) (129) (136) (139) ANZ Metals % -9% -12% 4% 3% Europe Metals % -1% -8% 3% 3% EBIT by region Aggregate volumes '000 t 10,481 9,300 9,473 9,727 North America Metals m 12 (21) Growth % -11% -11% 2% 3% Australia and New Zealand Metals m Europe metals m Ratio Analysis FY15a FY16e FY17e FY18e Global E-recycling m Unallocated m 2 2 (1) (1) EPS (adjusted earnings) cps Total EBIT m EPS growth % 48% -88% 646% 31% EBIT margin % 2.2% 0.7% 2.4% 3.6% P/E x 17.4x 142.4x 19.1x 14.6x EV/EBITDA x 5.5x 8.4x 5.0x 3.8x Net interest expense m (1) (9) (6) (5) EV/EBIT x 10.3x 37.7x 10.3x 6.8x NPBT m GCFPS cps Income tax expense m (39) (16) (29) (52) GCFPS growth % 42% -27% 12% 5% NPAT m P/CF x 5.9x 8.1x 7.2x 6.9x Growth % 47.5% -87.8% 645.6% 30.8% DPS cps Non-recurring item m 8 (232) - - Dividend Yield % 3.4% 2.3% 2.8% 3.4% Net debt m (314) (371) (455) (551) NPAT attributable to shareholders m 110 (220) Gearing (ND/[ND+E]) % -17% -24% -30% -37% Return on equity % 5.1% 0.6% 4.8% 6.1% Adjusted NPAT m Interest coverage (EBIT/Net Int) x 177.1x 4.1x 19.9x 35.8x Growth % 47.5% -87.8% 645.6% 30.8% Return on Cap (NOPAT/Eq+ND) % 5.5% 1.7% 6.0% 8.4% Cashflow FY15a FY16e FY17e FY18e Valuation - EV/EBIT m EBITDA m ch. In Working Capital m (3) FY16e FY17e FY18e FY16e FY17e FY18e Net Interest Paid m North America Metals NAV-based Tax Paid m Australia and New Zealand Metals Other m (7) Europe metals Total Operating Cashflow m Global E-recycling Capex m (95) (104) (120) (110) Investments movement m Total ,372 1,758 Investing casfhlow m 42 (100) (120) (110) - Growth Proceeds from Equity Issues m Net (debt)/cash Borrowings Movement m (48) (7) - - Equity value 1,110 1,828 2,310 Dividends Paid m (53) (47) (41) (51) # of shares Other m (0) (12) - - Value per share Financing cashflow m (100) (66) (41) (51) Exchange rate adjustments m Net cash movement m Balance sheet FY15a FY16e FY17e FY18e Cash m PPE m 1,032 1,009 1, Total assets m 2,882 2,599 2,626 2,701 Borrowings m Total liabilities m Total shareholders equity m 2,113 1,905 1,957 2,027 m FY15a FY16e FY17e FY18e Total EBIT EBIT margin 4.0% 3.0% 2.0% 1.0% 0.0% m EV FY15a FY16e FY17e FY18e 0% -10% -20% -30% -40% Cash Borrowings Gearing (ND/[ND+E]) 19 May

8 Important disclosures: Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. 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Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2016 AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients) BSL AU vs ASX 100, & rec history SGM AU vs Small Ordinaries, & rec history 19 May

9 (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May month target price methodology BSL AU: 7.00 based on a Sum of Parts methodology SGM AU: 8.90 based on a EV/EBIT methodology Company-specific disclosures: BSL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Bluescope Steel's equity securities. SGM AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Sims Metal Management Ltd's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Target price risk disclosures: BSL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. SGM AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. 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